- CA CHANDRASHEKHAR N.VAZE0 4 . 0 3 . 2 0 2 0

Code of Ethics

Bombay Chartered Accountants’ Society

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Note:2

This PPT is in the process of being revised by

adding a few slides on certain recent

developments in the field of Code of Ethics.

The supplementary PPT will be made available in

due course of time.

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That person who is awake in those that sleep, shaping desire after desire, that, indeed,

is the pure. That is Brahman, that, indeed, is called the immortal. In it all the worlds rest

and no one ever goes beyond it. This, verily, is that, kamam kamam : desire after desire,

really objects of desire. Even dream objects like objects of walking consciousness are

due to the Supreme Person. Even dream consciousness is a proof of the existence of

the self.

No one ever goes beyond it : cf. Eckhart : 'On reaching God all progress ends

Motto3

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Introduction

Ethics means moral values – accountability to one’s

conscience.

Code of Ethics (‘COE’) is not only philosophical, but

practical. Hence, the title – ‘Code of Ethics’ – Practical

Issues’

Eternal vigilance is the cost of independence.

In the field of Ethics, one is either ethical or not ethical.

There is no ‘in between’ stage.

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A shield rather than a burden

Need of COE

Why we alone are subjected to such a rigorous code?

To ensure credibility which is the foundation of our

profession

Society’s expectations

An outsider’s perception - delays, mild punishment etc.

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Source of COE.....

Ethics are as old as human civilization

Taittreeya Upanishad

Satyam Vada – Speak the truth

Dharmam Chara – Follow the rules of the religion

(perform duty); and

Swadhyayan-Ma-Pramadah – Do not commit default in

self-study (This is our CPE).

COE is nothing but elaboration of these principles

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Present Image

Not assertive but too accommodative

Credibility and respectability is diminishing

An item in the checklist of a respectable organization –

“avoid bringing CA certificates as the same are often found

unreliable”.

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Common observations – lapses leading to Disciplinary proceedings

Too much of ‘good faith’.

Weak documentation

Two important maxims to be remembered and followed:

Work should not only be done, but it should be seen that it is done.

And

Faintest of Ink is stronger than the strongest of memories.

Lack of pro-activeness

Obsession with tax considerations – principles of accounting

and auditing are side-lined

Lack of communication skills - inability to say ‘No’

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A couple of actual cases

Absence of letter of appointment or reappointment – Good faith.

Not obtaining of a copy of Board Resolution approving the accounts – Expert Advisory Committee’s opinion – Sec. 215 of Companies Act, 1956.

Signing the balance sheet in good faith when only one director has signed.

Two brothers and directors

A CA certified the balance sheet of other CA firm – in the books there was a meager negative cash balance on one day.

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Suggested Reading

The Chartered Accountants Act, 1949 [as amended by the CAs

(Amendment) Act, 2006]

CA Regulations of 1988 (updated as on July 01, 2013)

ICAI publication on ‘Code of Ethics’ (Eleventh edition January 2009)

Chartered Accountants (Procedure of Investigations of Professional

and other misconduct and conduct of cases) Rules, 2007 published in

official Gazette of India dated February 28, 2007 (‘Enquiry Rules’)

FAQs published by ICAI. (February 01, 2012)

Appellate Authority (Procedure) Rules, 2011

Manual for members

ICAI Website for various pronouncements.

ESB website; CA Ethics Plus – handy brochure issued by ESB.

Speaking ppt. on Code of Ethics launched by ESB as an e-learning

initiative

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Two Schedules

Second Schedule (Outsiders affected)

Part Particulars No. of Clauses

I Professional misconduct in relation to CAs in practice. 12

II Misconduct in relation to members in service 2

III Misconduct in relation to members in general 3

IV Other Misconduct’ in relation to all members generally 2

Part Particulars No. of Clauses

I CAs in practice 10

II Clauses relating to members generally 4

III Residuary cases of ‘Other Misconduct 1

First Schedule (internal to the profession)

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Chapter V – Provisions relating to Misconduct

Section

No

Scope

21 Disciplinary Directorate (‘DD’)

21A Board of Discipline (‘BOD’) – First Schedule offences

21B Disciplinary Committee (‘DC’) – Second Schedule offences

21C Authority of BOD, DC and Director Discipline

22A Appellate Authority (‘AA’) - to deal with offences under both the

Schedules

22 Professional and other misconduct.

Since it covers ‘other misconduct’ also, the scope is very wide

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Important Pronouncements of ICAI

Guidelines for advertisement for members in practice

List of occupations which require general or specific

permission (Appendix 9 of CA Regulations, 1988)

Council General Guidelines, 2008

Recommended self regulatory measures

Guidelines for conversion of CA firms in to LLPs

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Authority attached to the various documents issued by the Institute :

Statements –The deviation from the statement should be adequately

disclosed.

Accounting Standards and Auditing and Assurance Standards

(AAS) which are now known as Standards on Auditing (‘SA’). These

become mandatory from the dates notified by the Institute from time to

time. Till then, the `statements’ remain in force. Once an AS/SA

becomes mandatory, the concerned statement or its relevant part

stands withdrawn.

Guidance Notes - These are recommendatory in nature. A member

should ordinarily follow them except where he is satisfied that in the

circumstances of the case, it may not be necessary to do so. He may

also consider a suitable disclosure in this regard.

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Disciplinary Mechanism-Authorities

Constitution of BOD• An eminent person in the field of law to preside

• One member of the Council

• One nominee of the Central Government

Constitution of DC • President or Vice – President

• 2 members of Council

• 2 nominees of the Central Government

Constitution of Appellate Authority• Chairperson – Judge of High Court

• 2 ex-members of Council

• 2 nominees of Central Government

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Important principles

Misconduct proceedings - initiated on receiving a Complaint or

information from any source. There can be suo moto action by the

Council.

Complainant need not come with clean hands. Council not concerned

with the locus standi of Complainant.

Withdrawal of complaint permitted only with permission of BOD / DC.

Council has jurisdiction basically over an individual member; and not

over firms; or on outsiders.

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Important principles (contd.)

Complaint filed beyond period of 7 years may not be entertained at the

discretion of the Director Discipline if he is satisfied that it would be

difficult obtain evidence on account of time lag or that it would be

procedurally inconvenient.

Even if Respondent compensates the complainant for any losses, it will

not undo the misconduct.

Even if nobody is aggrieved due a particular lapse / misconduct of the

member, there can be disciplinary proceedings against the member.

There is no time limit for disposal of complaint! Proceedings may

continue for years together!

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Broad procedure Complaint to be filed in Form I.

Filing fee Rs.2,500/-

Complaint forwarded to Respondent for his explanation.

Written statement (21 days) extension not exceeding 30 days.

Explanation forwarded to complainant for his rejoinder.

Rejoinder (21 days extension not exceeding 30 days)

After examining these three documents, DD may call for any

information as he thinks necessary; and decide whether there is a

‘prima facie’ guilt under either of the schedules or ‘other misconduct’.Cntd….

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Broad procedure (contd.)

If no prima facie finding of ‘guilt’, the matter is closed with the concurrence of BOD / DC.

If prima facie guilty, then BOD/DC depending upon the nature of offence conducts a detailed enquiry.

BOD/DC to give report on its findings as to the guilt.

One more hearing to decide the punishment.

Orders then passed by BOD/DC are appealable to AA. Member of ICAI aggrieved by order of BOD/DC; or the DD may prefer an appeal.

Appeal is to be filed within 90 days from the date of receipt of the order.

Filing fee Rs.5,500/-

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Persons authorised to represent

Any other member of ICAI

Any advocate

Any member of ICSI or ICWA

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Hearings before BOD / DC

Board of Discipline (‘BOD’)

Quorum is 2. Follow summary procedure. Rules of natural justice

to be followed.

Adjournment not more than once. If ‘guilty’ – then one more

opportunity of hearing before awarding punishment.

Disciplinary Committee (‘DC’)

Quorum 3 (of which atleast one is a Govt. nominee).

Witnesses can be called.

Rules of natural justice to be followed.

Adjournment not more than once. Inability of representative shall

not be a valid ground.

If guilty, one more opportunity to the Respondent before

awarding punishment.

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Punishment

Punishment may be any one or more of the following –

For First Schedule (by Board of Discipline)

Reprimand

Suspension upto 3 months

Fine upto rupees one lakh.

For Second Schedule (by Disciplinary Committee)

Reprimand

Suspension for any period or permanently

Fine upto rupees five lakhs.

Now, there is no need to refer the case to High Court.

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Indirect punishment

Disqualification from allotment of audits from RBI, other

banks, C & AG and other Government Bodies (these are

the restrictions of the respective Govt. bodies).

Eligibility to train articles is lost.

A stigma. Almost invariably, the process itself is more

torturous and painful than the punishment itself.

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Complainants

Who complains?

Users of our services – viz. Clients, Financial Institutions, Banks,

Lenders, Investors, Regulatory Authorities are the complainants.

Staff members, articled trainees, co-professionals, total

strangers, members against their own partners.

Complaints may be filed out of ego clashes, rivalry or as an arm

twisting measure.

Existence of professional black mailer

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Other exposures / vulnerability

Police - criminal complaint. This often results into arrest

and police custody.

Press, for defamation

Consumer Forum

‘Peer Review’ could be a good preventive step. It

should be taken and implemented in its proper spirit

by our members in their own self interest

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Arbitration

There is one welcome development. For resolving the

disputes or grievances among the members inter-se; or

between articled trainees and members, ICAI is planning to

introduce the concept of arbitration. It is expected to lessen

the hardship, shorten the time and reduce the expenditure.

At the same time, it could be more effective.

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Clauses of both the Schedules

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First SchedulePart I

Clause

no.

A member in practice would be guilty of misconduct if he:

(1) Allows any person to practice in his name except his partner and

employee who is also a chartered accountant

(2) Pays any share , commission or brokerage to person other than

member of Institute or his partner or retired partner

(3) Accepts profits from a person who is not a member of Institute

(4) Enters into partnership with person who is not member of Institute

(5) Secures work from person who is not his employee or partner.

(6) Solicits work by circular, advertisement, personal interview etc. (except

to the extent allowed)

(7) Advertises his professional services (except to the extent allowed)

(8) Accepts audit work without first communicating with the previous auditor

in writing

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First Schedule (Contd.)

Part I (contd.)

Clause

no.

A member in practice would be guilty of misconduct if he:

(9) Accepts audit work without first ascertaining that requirements of

section 225 of the Companies Act, 1956 (now section 140 of the

Companies Act, 2013) are complied with.

(10) Accepts professional assignment where fees are based on percentage

of profits or are contingent upon the findings or results.

(11) Engages in any other business or occupation (barring few exceptions)

(12) Allows a person who is not his partner or any other person who is not

a member of the Institute to sign on his behalf any balance sheet,

profit and loss account, report or financial statements

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First Schedule (Contd.)

Part II – Members in service

Clause

no.

A member (other than member in practice) would be guilty

of misconduct if he:

(1) Undertakes to share his emoluments of employment

(2) Accepts any part of fees, profits or gains from any lawyer, CA,

broker engaged by the company, customer as commission or

gratification

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First Schedule (Contd.)

Part III – Members generally

Part IV – Other misconduct

Clause

no.

A member (whether in practice or not) would be guilty of

misconduct if he:

(1) Not being a fellow, acts as a fellow

(2) Does not supply information called for by the Institute, Council, its

Committees, Director (Discipline), BOD, DC etc.

(3) Gives information knowing it to be false while inviting professional

work, responding to tenders, enquiries or publishing write up.

Clause

no.

A member (whether in practice or not) would be guilty of

misconduct if he:

(1) Is held guilty by any civil or criminal court which is punishable with

imprisonment not exceeding 6 months.

(2) Brings disrepute to the profession

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Second Schedule

Part I

Clause

no.

A member in practice would be guilty of misconduct if he:

(1) Discloses information acquired in the course of professional engagement

to any person other than his client.

(2) Certifies any report of financial statements unless the examination has

been done by him or his partner or employee or by any other CA in

practice

(3) Gives an impression that he vouches for the accuracy of the forecast.

(4) Expresses his opinion on financial statements of any business in which

he, his firm or partner has a substantial interest.

(5) Fails to disclose a material fact which is not disclosed in the financial

statement but the disclosure of which is necessary.

(6) Fails to report a material misstatement

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Second Schedule (Contd.)

Part I (Contd.)

Clause

no.

A member in practice would be guilty of misconduct if he:

(7) Does not exercise due diligence or is grossly negligent.

(8) Fails to obtain sufficient information which is necessary for expression of

opinion.

(9) Fails to invite attention to any material departure from generally accepted

audit procedures.

(10) Fails to keep moneys of client other than money meant to be expended

in a separate banking account.

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Second Schedule (Contd.)

Part II:

Part III:

Clause

no.

A member (whether in practice or not )would be guilty of

misconduct if he:

(1) Contravenes any provisions of this Act or regulations etc.

(2) Being an employee of company, firm or any other person discloses

confidential information

(3) Includes in any document to be submitted to the Institute, Council, its

Committees etc. any information knowing it to be false.

(4) Defalcates or embezzles moneys

A member whether in practice or not would be guilty of misconduct if he is

held guilty by any civil or criminal court for an offence which is punishable

with imprisonment exceeding six months.

Part III :

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Audit of a cooperative society – issues faced

Auditors pressurized to give favourable grade inspite of

there being many adverse comments.

In case of frauds or serious irregularities, the auditor

himself is required to file a police complaint.

SA 700 (previously AS 28).

Emotional blackmailing.

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Advertisement and solicitation(Clause 6 of Part I of the First Schedule)

Circulation of letter to small group of clients for soliciting work

or to persons who are likely to require services of a Chartered

Accountant

Prohibited

Announcement in newspaper for changes in constitution of

partnership or address etc.

Permitted. Should

be limited to a bare

statement of facts

Advertisement for soliciting clients under box numbers in the

news paper

Prohibited

Application for empanelment for allotment of audit Permitted. But

cannot make roving

enquiries as to

whether such panel

is maintained

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Advertisement and solicitation (Contd.)

Tenders Responding to tenders permitted

Publication of books or articles Permitted. Association with any

firm of CAs should not be

mentioned.

Issue of greeting cards or invitations: Permitted. Can be sent to clients,

relatives and friends. Designation

‘Chartered Accountant” and name

of the firm is permitted. Any other

professional designation, status

and qualifications etc. is not

permitted.

Classified advertisement in the Journal / Newsletter of the Institute

Permitted. But only in the Journal or Newsletter of the Institute

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Advertisement and solicitation (Contd.)

Giving public interviews Permitted. Name of the firm

should not be mentioned.

Photographs Permitted. Provided no payment

is made foe such publication. No

reference to the name of the firm.

Sign board for office Permitted. Use of glow signs or

lights should be avoided.

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Write ups•Limited advertisement through write up now allowed

•Guidelines dated 14th May,2008 - a “write up” is the writing of particulars setting

out services rendered by the Members issued, circulated or published by way of

print or electronic mode or otherwise including in newspapers, journals,

magazines and websites ( in Push as well in Pull mode) in accordance with

the Guidelines.

•The write-up should not include the names of the clients (both past and

present).

•The write-up should not contain any information about achievements / awards or

any other position held.

•It is mandatory to mention the membership number and firm registration number

with Institute.

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Communication with previous auditorClause 8 of Part I of the First Schedule)

Communication - before accepting the audit and not merely before

signing the report

RPAD - advisable so as to create fool-proof evidence

Where there is no reply from the outgoing auditor, audit can be

accepted after reasonable period has elapsed. Actual NOC is not a

precondition

Where undisputed audit fee of outgoing auditor are outstanding –

accepting audit assignment itself is a misconduct

Applies to all kinds of audits – statutory audit, tax audit, internal audit,

concurrent audit, VAT audit and audit of Govt. entities etc.

Previous auditor means the immediately preceding auditor. Where

there was no audit in a particular year, previous auditor would mean

auditor of the year when the audit was last done.

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Engaging in any other profession or occupation (Clause 11 of Part I of First Schedule)

See Appendix 10 to the Regulations (1988)

Part A– general permission

Part B – specific permission

Members are permitted to become sleeping partner in a family run business.

He can also be a karta of an HUF, but should not be actively engaged in the

carrying on of the activities.

Members are permitted to be an ordinary / simple director in a company or

promoter of a company (Director Simplicitor).

Members engaged in other business or occupation - not allowed to perform

attest function and train articles barring a few exceptions (like teaching

assignments not exceeding 25 hours).

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Sharing of fees or partnership with a non-member

See Regulations 53A and 53B of CA Regulations.

Partnership with sister-professionals like CS, CWA, lawyers

allowed (subject to certain conditions).

Sharing of fees with other professionals like CS, CWA,

Actuary, B.E., B.Tech, Architect, Lawyer and MBA allowed.

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Lack of due diligence or a case of gross negligence

Clause (7) of Part I of the Second Schedule)

The scope is enlarged by Amendment. It not only mentions ‘gross

negligence’; but also now covers ‘lack of due diligence’.

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Council General Guidelines, 2008

The Guidelines pertain to –

Conduct of a member being an employee.

Prohibition of appointment of member as cost auditor.

Prohibition on expressing an opinion on financial

statements of a relative.

Maintenance of books of account by Members.

Ceiling on tax audit assignments (Max. 60 nos. other than

clause (c) of Sec. 44AB of I.T. Act, 1961).

Appointment of an auditor where undisputed audit fees of

previous auditor are unpaid.

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Council General Guidelines, 2008 (contd.)

Maximum number of audit assignments under Companies

Act, 2013 that can be held by a member shall be 30 nos.

despite the ceiling / liberties specified in Companies Act.

Members are required to maintain a register of audits done.

Ceiling on fees for other assignments of the same client

whose statutory audit is done by a member.

Not to accept audit where member is indebted for more

than Rs.10,000/-

Directions on unjustified removal of auditors.

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Other recommended self-regulatory measures

Branch audit and joint audit vis-à-vis no. of partners.

Ratio between qualified and unqualified staff.

Disclosure of interest by auditors in other firms.

Ceiling on the fees. Interestingly the clause relating to

undercutting of fees is being deleted.

Know Your Client Norms

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ESB Brochure47

Some interesting FAQs from the brochure:

“53. Whether a statutory auditor can accept the system audit of same entity?

Yes, the statutory auditor can accept the assignment of a system audit of the same entity, provided it did not involve any scrutiny/review of financial data and information.

66. Can a Concurrent Auditor of a Bank also undertake the assignment of quarterly review of the same bank?

No, the Concurrent audit and the Assignment of quarterly review of the same entity cannot be taken simultaneously as the concurrent audit is a kind of internal audit and the quarterly review is a kind of statutory audit. It is prohibited in terms of the `Guidance Note of Independence of Auditors’.

67. Can a member act as an Insurance Agent and arrange business for Insurance Company?

No, members are permitted to render Insurance Financial Advisory services. It is not permissible to the members to do any kind of marketing and business procurement for any insurance company. There services should remain limited to professional services in the form of advisory and consultancy services”.

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Other misconduct

Section 22 covers items of misconduct specified in the Schedules and also “other misconduct”. The Council is empowered to take action in such cases with a view to upholding the overall image of the members in the society. Thus, a person’s conduct may be unbecoming of a professional, even as a human being.

Without prejudice to the generality of the coverage of ‘Other Misconduct’, now, both the Schedules contain separate parts specifying ‘Other Misconduct’. These parts cover mostly offences of civil or criminal nature or any act that would bring disrepute to the Institute.

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Thank you

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